Chairman Johnson, Representative Stark, distinguished
Subcommittee members, thank you for inviting me to discuss
the Medicare+Choice program, and more specifically the
level of beneficiary cost sharing some Medicare+Choice
enrollees will be asked to pay next year to remain in
the plans. Medicare+Choice is an important option for
millions of our nation's elderly and disabled, and I appreciate
the opportunity to discuss it with you today.

Medicare+Choice has enabled us to take advantage of private
sector expertise to give Medicare beneficiaries more services
for their premium, often with lower cost sharing and more
benefits than are available under traditional Medicare.
The private companies that provide Medicare+Choice benefits
are required to cover all of the health care services
that a beneficiary could receive in original, fee-for-service
Medicare. Moreover, Medicare+Choice plans are valuable
to beneficiaries because they traditionally improve on
fee-for-service Medicare benefits by offering programs
and covering services that are not covered under original
Medicare. These can include prescription drugs, routine
vision care, dental care, and lower copayments. They also
make it unnecessary to purchase increasingly costly supplemental
Medigap plans, with premiums that are often two or three
times higher than the Medicare premium itself. By making
these services and additional benefits available, Medicare+Choice
provides more options to millions of people who are covered
by Medicare in how they receive their health care; and
millions are able to lower their health care expenses
substantially. In addition, Medicare+Choice plans provide
a valuable alternative to fee-for-service Medicare and
Medigap, whose out-of-pocket costs are often much higher
for beneficiaries.

As you know, the Medicare+Choice program has changed
significantly in the last several years. Hundreds of plans
have left the program or reduced their service areas affecting
hundreds of thousands of beneficiaries. Plans with both
zero premiums and no significant beneficiary cost sharing
have largely disappeared. In addition, plans are offering
less generous drug benefits. This is because annual increases
in Federal Medicare+Choice funding have failed to reflect
rising health care costs. Unfortunately, as a result,
plans that wish to stay in the program are left with two
options: reducing benefits or increasing beneficiary cost
sharing. We have taken many administrative actions to
stabilize the Medicare+Choice program and reduce burden.
Congress has acted to increase funding for Medicare+Choice
in recent years, but much of the increase was targeted
to areas with low enrollment. For example, between 1998Ė2002,
Medicare+Choice rates increased 11.5 percent in counties
that received the minimum payment update. This compares
with a cumulative increase in fee-for-service spending
of over 21 percent over the same time period. Thus, the
rate of growth in fee-for-service rates is nearly twice
that of Medicare+Choice in the counties where 65 percent
of Medicare+Choice enrollees live. It is clear that much
more needs to be done and we are committed to working
with Congress and the plans to protect this valuable option
for beneficiaries.

As mentioned above, following the trends in Medicare
generally, we are seeing a greater share of Medicare+Choice
health care costs borne by beneficiaries. This is similar
to what is occurring commercially and in the fee-for-service
Medigap market. I am concerned about this and have been
tracking it closely. In our guidance to Medicare+Choice
organizations earlier this year, we advised them that
their 2002 beneficiary cost sharing proposals would be
closely examined. This year we identified Medicare+Choice
plan cost sharing proposals that we believed may have
been unreasonable, and we worked with the identified organizations
to make changes to their cost sharing proposals. We also
required plans to promptly notify beneficiaries of any
changes in their benefits or cost sharing. Because of
our experience this year and our desire to protect beneficiaries,
as well as to be good business partners to the plans,
we are looking at reasonable ways that we can assist plans
in setting cost sharing amounts for different benefits
in the future. For example, I recently worked extensively
with Congressman Kleczka on some tough issues in Wisconsin.
I also am happy to announce that because the process for
submitting ACRs was delayed this year, we declared a nationwide
Special Election Period for all plans during the month
of December this year. As a result, for this year only,
all beneficiaries will have the option to request disenrollment
from their Medicare+Choice plan and return to original
Medicare during the month of December and to purchase
a Medigap policy using their guaranteed issue rights,
which will last until March 4, 2002. Of course, the premiums
for these Medigap policiesí premiums are also rising rapidly
because of the gaps in benefits in the traditional fee-for-service
Medicare program and increasing health costs generally.
This is why we need to modernize benefits in the traditional
fee-for-service program, as well as make Medicare+Choice
payments fairer.

We also are continuing to take important steps in helping
to ensure Medicare beneficiaries are informed of their
health plan options and are able to get answers to all
of their Medicare questions. We are conducting a $30 million
beneficiary education advertising campaign, we expanded
our toll free beneficiary telephone help line, and we
mailed additional materials to advise beneficiaries of
health plan changes. This sort of education is vital for
beneficiaries to understand their health care options
and make the decisions that are best for them, and the
education campaign has generated substantial response
from beneficiaries.

BACKGROUND

Medicare has a long history of offering alternatives
to the traditional Medicare fee-for-service program to
our beneficiaries. In the 1970ís Congress authorized Medicare
risk contracting with managed care organizations, and
in the 1980ís Congress modified the program to make it
more attractive to managed care companies. In the Balanced
Budget Act of 1997, Congress created the Medicare+Choice
program to expand the types of private entities eligible
to contract with Medicare to address some perceived flaws
in the risk-contracting program and reduce variation in
payment for plans across the country. Since passage of
the BBA, Congress has refined the Medicare+Choice program
through the Balanced Budget Refinement Act of 1999 and
the Medicare, Medicaid, and SCHIP Benefits Improvement
and Protection Act of 2000 (BIPA). These changes primarily
address payments in the "floor" counties, not
the "minimum update" counties that have the
majority of Medicare+Choice enrollees and are facing the
tightest pressures to control their costs even as health
costs and costs in the Medicare fee-for-service program
rise more rapidly.

This year about 5.6 million, or nearly 15 percent of
all Medicare beneficiaries, were enrolled in a Medicare+Choice
plan. For 2002, about 60 percent of all Medicare beneficiaries
have access to a Medicare+Choice option, and about 536,000
beneficiaries will be impacted by Medicare+Choice organizations
either withdrawing from the program or reducing their
service areas. Fortunately, most affected enrollees have
at least one other plan available in their area for next
year. Of course, these beneficiaries also can choose to
enroll in traditional Medicare. The number of beneficiaries
affected by the departing plansí decisions this year is
smaller than many in the industry predicted and fewer
than the number affected last year. However, despite our
best efforts to slow the number of plan withdrawals through
administrative actions, it is apparent that additional
improvements need to be made to the Medicare+Choice program
to encourage more plan participation and greater beneficiary
access to Medicare options. Simply put, the Medicare+Choice
payment system must be more responsive to the health care
marketplace, so that the program can meet beneficiariesí
needs. I look forward to working with Congress to achieve
the important changes that beneficiaries deserve. We owe
it to beneficiaries to make these changes soon to ensure
that Medicare can continue to provide affordable options
for beneficiaries.

STRENGTHENING MEDICARE+CHOICE OPTIONS

One of the most important ways that we can help beneficiaries
is by working with Medicare+Choice organizations to ensure
the program remains a valuable option. President Bush,
Secretary Thompson, and I share the goal of improving
the Medicare+Choice program and reversing the decline
in plan participation. Yet some Medicare+Choice organizations
are struggling with difficult business decisions. In fact,
since my confirmation as CMS Administrator, I have personally
contacted many of these plans and talked with them about
how much the Medicare program and our beneficiaries need
their continued participation. Fortunately, many of them
have decided to continue to participate in the Medicare+Choice
program.

To ensure that Medicare+Choice remains a valuable option
for beneficiaries, we have taken a number of steps to
reduce administrative burdens on the Medicare+Choice organizations.
Earlier this year we announced a number of actions that
will reduce administrative burdens on Medicare+Choice
plans in a number of ways, including:

Permitting Medicare+Choice organizations to submit
revised adjusted community rate (ACR) proposals in the
fall. Many Medicare+Choice organizations indicated
that they would drop out of Medicare+Choice if forced
to decide whether or not they would continue to participate
in the program and provide final 2002 ACR information
by the July 1 deadline. By giving plans until September
17th to make renewal decisions, and permitting
them to file revised ACR proposals, which contain their
benefit packages and cost sharing structures, as late
as that date, we ensured that plans could better evaluate
their participation in Medicare+Choice and their products
for beneficiaries. We would like to work with Congress
to make this change in law.

Emphasizing better results for beneficiaries.
We will replace calendar-driven audits of Medicare+Choice
plans with results-based performance audits, so that
we target audits at the plans whose level of performance
requires review. This will allow the strong performing
plans to spend less time with paper and more time with
patients.

Providing consistency in quality improvement requirements.
We are developing quality measures that are sensible,
reflect current industry practice, and build on the
success of the private sector. To this end, we are working
with industry representatives, such as the American
Association of Health Plans, Blue Cross Blue Shield
Association, Health Insurance Association of America,
and American Medical Association, to plan and enhance
the national Quality Assessment Performance Improvement
projects. Additionally, we recently allowed quality
improvement projects created for private plans and Medicaid
to be used for Medicare.

Streamlining marketing review. We are working
to make the approval process for Medicare+Choice marketing
material more sensible and less burdensome on the Medicare+Choice
plans. We are taking steps to fast track our review
of plan marketing materials, while at the same time
ensuring that beneficiaries have timely and accurate
information.

Expediting plan review. We will expedite our
review of potential Medicare+Choice plans that would
serve markets left without a Medicare+Choice option
or other alternatives to traditional fee-for-service
Medicare.

Making policy changes quarterly. It is critical
that Medicare+Choice organizations have adequate time
to adjust to new rules. Additionally, we strive to ensure
that policy guidance is issued before Medicare+Choice
plans' rate and benefit filings are due. To that end,
and to ensure the Medicare Managed Care Manual meets
evolving needs, we will update the existing manual chapters
quarterly. Any policy changes contained in the updates
that create new burdens will not be effective until
that policy change can be reflected in an organizationís
ACR proposals. We also have committed that no policy
changes will become effective until the next contract
year.

Re-evaluating the risk adjustment system. We
suspended our collection of physician and hospital outpatient
department encounter data. Fair risk adjustment is an
important priority, but risk adjustment must be done
in a way that encourages innovation in health care delivery
and not in a way that imposes outdated fee-for-service
models. We are exploring a way of adjusting Medicare+Choice
rates for risk that will balance the accuracy of data
and administrative burden.

Consolidating private plan functions. Medicare+Choice
functions that previously resided within three different
components of CMS now are all housed in one place at
CMS: the Center for Beneficiary Choices, which will
help ensure that we are responsive to the specific needs
of Medicare+Choice plans. We are striving to improve
coordination between Medicare+Choice and fee-for-service
and to be more sensitive to the impact of systems changes
on the plans. To this end, our Medicare+Choice staff
now participates on the Medicare Change Control Board,
which governs carrier and fiscal intermediary systems
changes. Their participation helps ensure that the needs
of Medicare+Choice plans are considered as the Agency
determines future information systems changes.

Furthermore, we recently gave Medicare+Choice organizations
new flexibility to work with employer-sponsored health
plans so workers can seamlessly merge their pre-retirement
benefits into Medicare coverage. This flexibility will
give Medicare beneficiaries the kind of private plan choices
currently available to many working Americans. Medicare+Choice
organizations can tailor plans to the specific needs of
employer group members while supplying all Medicare-covered
health services, making it easier for them. And we plan
to further reinvigorate the Medicare+Choice program by
encouraging plans to modify their designs from "closed
panel" HMOs to preferred provider organization and point-of-service
models that have proved popular in the private sector.

PROTECTING BENEFICIARY COSTS

Each contract year, Medicare+Choice organizations submit
to us their ACR proposals for the plans they intend to
offer to Medicare beneficiaries in the following year.
The ACR proposals describe the costs and benefits the
plans intend to offer for their enrollees for the following
year. We review the proposals to ensure that beneficiary
premiums and copayments for basic Medicare+Choice benefits
(Parts A and B and additional benefits) do not cost more
than beneficiaries would pay on average for fee-for-service
Medicare cost sharing. For 2002, the estimated average
actuarial value of cost sharing amount is $105.31 per
month per person. This $105.31 cap is an aggregate cap,
not a per-benefit cap. Under this aggregate cap cost sharing
for particular benefits can vary as long as the total
average cost sharing (for Parts A and B and additional
benefits) does not exceed the aggregate cap of $105.31.
This actuarial figure excludes cost sharing for many other
benefits that are part of modernized health insurance
plans, but not Medicare including prescription drugs and
disease management services. While there are not specific
cost sharing limits for most Medicare benefits, Medicare+Choice
plans cannot set cost sharing amounts for Medicare covered
services at dollar amounts that would discourage people
who have greater health care needs from enrolling in Medicare+Choice
plans.

As a general rule, as long as the premium charged in
addition to the actuarial value of cost-sharing under
the plan is less than the actuarial value of fee-for-service
Medicare deductibles and cost-sharing, the Medicare+Choice
organization is free to structure its cost sharing how
it sees fit. However, this year we found that some plans
proposed charging beneficiaries what we believed were
unreasonably high copays for particular services. The
situation we witnessed this year is compounded by the
fact that payment increases have not kept pace with plan
costs nor have they kept pace with the costs of extra
benefits that plans provide, particularly prescription
drugs. Thus, we have a new challenge in balancing the
need for plans to make decisions about their benefit packages
and cost sharing amounts with the important requirement
that plan designs do not discourage enrollment. The concern
is always that high cost sharing could discourage beneficiaries,
who have greater health care needs, from enrolling in
or remaining a member of these particular plans.

To address this, we worked cooperatively with the plans
to ensure that their cost sharing arrangements were made
more reasonable, while at the same time helping to make
certain that the plans would continue to participate in
Medicare+Choice. While the final agreements we reached
with the plans were not perfect, they were much more reasonable
than they were at the outset. Moreover, the continued
participation of the plans in the Medicare+Choice program
provides beneficiaries access to additional options and
extra benefits. Even with the higher cost sharing, we
expect that many beneficiaries will continue to find Medicare+Choice
plans as a much more affordable option than the cost sharing
and rising Medigap premiums under the traditional Medicare
program.

We also are developing specific guidelines that we hope
will help address the situation we faced this year regarding
plansí ACR submissions. Our guidelines will make it clear
that we will not approve cost sharing arrangements that
could discourage beneficiaries with high health costs
from enrolling or staying in a plan. In developing these
guidelines, we will consider a number of factors such
as the cost sharing in fee-for-service, the cost sharing
of other plans in the service area, changes in the planís
cost sharing from previous years, as well as stop-loss
protection and limits on cost sharing expenses. Our guidance
also will explain how we plan to evaluate plansí benefit
and cost sharing proposals.

EDUCATING BENEFICIARIES ABOUT THEIR OPTIONS

We know that our outreach efforts to educate beneficiaries
about their health care options are vital. We also know
from our consumer research with Medicare beneficiaries
that far too many of them have a limited understanding
of the Medicare program in general, as well as their Medicare+Choice,
Medigap, and Medicare Select options. So for this year
we added a vastly expanded advertising campaign to educate
beneficiaries about the full range of options open to
them. And we have enhanced our toll-free telephone help
line, 1-800-MEDICARE (1-800-633-4227 or TTY/TDD 1-877-486-2048)
with 24-hour service, seven days a week. We also have
hired 1,200 customer service representatives at our call
centers. These representatives are available to answer
specific questions about an individual's health plan options
as well as mail beneficiaries hard copies of the customized
information immediately after each call.

Additionally, we are continuing to improve the resources
we have available on the Internet for beneficiaries and
their families to access comparative information and are
providing a new decision making tool on our award winning
website, www.medicare.gov. Our MedicareHealth Plan Compare gives visitors the ability
to compare benefits, costs, options, and provider quality
information. This expanded information is similar to our
other online comparative resources like the Nursing
Home Compare and Dialysis Compare websites.
With Medicare Health Plan Compare, beneficiaries
are able to examine by zip code the Medicare+Choice plan
options that are available in their area based on characteristics
that are most important to them, such as out-of-pocket
costs, whether beneficiaries can go out of network, and
extra benefits. They also will be able to compare the
direct out-of-pocket costs between all their health insurance
options and get more detailed information on the plans
that most appropriately fit their needs. In addition,
we are working to provide similar State-based comparative
information on Medigap options and costs. These outreach
efforts are vital to ensuring that Medicare beneficiaries
understand the options available to them, and that they
can make the decisions that best fit their personal needs.

CONCLUSION

While Medicare+Choice is still an important option for
millions of Medicare beneficiaries, the program has undergone
some substantial changes since 1997. The days of plans
offering zero premiums and no significant beneficiary
cost sharing have for the most part passed. Health care
costs continue to rise, and more and more of the financial
burden is falling on Medicare beneficiaries. I have followed
this transformation closely, and am working hard to educate
beneficiaries about these changes as well as their options,
monitoring beneficiary cost sharing, and working closely
with the plans to ensure that beneficiary choices remain
available. We have taken a number of administrative steps
where we were able, but it is incumbent that we continue
to work with you and Congress to strengthen the Medicare+Choice
program for the future. Our beneficiaries depend on the
choice that Medicare+Choice provides. Thank you for the
opportunity to discuss this with you today, and I am happy
to answer your questions.